An Inside Look At China’s Ghost Cities.

We seldom write about China’s “ghost cities” because in our view they show little more than pockets of inefficiency from which every economy necessarily must suffer, particularly one as big and as centralized as China’s. So it was nice to receive the following guest post from Dirk Chilcote giving us additional reasons not to worry about China’s ghost cities.

Dirk is a second-year law student at Washington and Lee University. Before that, (from 2008 to 2011) he worked as an English and international studies teacher in Zhengzhou, China and in 2012 he was a Kathryn Davis Peace Fellow at Middlebury College where he studied advanced Mandarin. He currently focuses on international law, specifically US-China policy.

The following is Dirk’s take on China’s ghost cities:

Though I am not as altogether unworried about the Chinese real estate bubble as some, including China Law Blog (see China’s Ghost Cities. No Worry, No Cry), I am less worried than many in the media would apparently like me to be. After seeing the recently aired 60 Minutes “scare story” on the subject, however, I am leaning more toward unworried than I was before. Why? Let me explain.

In another 60 Minutes piece, entitled “Zhang Xin: China’s Real Estate Mogul,” [link no longer exists] ostensibly about Zhang Xin’s unlikely rise from poverty to becoming one of China’s wealthiest women, Leslie Stahl decided to segue into a story about the impending catastrophe in China’s residential housing sector. As I watched, I could not help but wonder how much of Stahl’s own leftover angst from the US housing crisis was tainting the report. I am not an economist, but it seems to me that comparing the US and Chinese housing markets is like comparing apples and dragon fruit.

Just as I was starting to get a little bored, however, something interesting happened. The scene suddenly changed from the interior of one of Ms. Zhang’s Beijing office buildings to a familiar looking high-rise. As I watched, it suddenly hit me: “That looks exactly like the building next to my old apartment.” I continued to watch intently as the camera panned an empty street when Stahl’s voice came in and confirmed my suspicion. I was being shown footage of my old neighborhood in Zhengzhou.

Now, the previously bland story about China’s imminent real estate market collapse became interesting on a whole new level. Stahl and the Hong Kong based real estate expert (British) she was interviewing went from shockingly abandoned building to shockingly abandoned building, reinforcing the idea of a Chinese residential housing market self-evidently on the brink of collapse.

My own experience on the mean streets of Zhengzhou tells a slightly different story. In my three years living and working in the neighborhood 60 Minutes decided to use for its doomsday exemplar, the most enduring memory I have is not of desolation, but rather of lightening fast development followed shortly thereafter by burgeoning numbers of new residents. Though the buildings that Stahl and her news crew visited might well be empty today, I myself recall remarking at an empty mall similar to the one highlighted in the 60 Minutes story and located in the same area, only to discover a few months later that the formerly desolate shopping center had become a well used retail attraction. To be sure, my Chinese friends and co-workers frequently complained about rising housing prices in Zhengzhou and how no one could afford them. At the same time, however, the population of the part of the New District in which I lived and which is located not far from the area featured by 60 minutes has witnessed a remarkable increase in population over a relatively short time.

Again, I am no economist. But after watching 60 Minutes’ coverage of China’s real estate market, it seems more apparent than ever that much of what Western news has to report on China should be received with a healthy dose of skepticism.

Dan Harris is internationally regarded as a leading authority on legal matters related to doing business in China and in other emerging economies in Asia. Forbes Magazine, Business Week, Fortune Magazine, BBC News, The Wall Street Journal, The Washington Post, The Economist, CNBC, The New York Times, and many other major media players, have looked to him for his perspective on international law issues.

I would really like people to reread this author’s last comment, “I am no economist.” I worked in a law firm in China and my supervisor was an ex-stock broker turned lawyer from China and all he talked about was the impending housing market crisis. This guy is just giving his viewpoint from his limited scope and I don’t even believe that his Chinese level is “advanced.” If it was, he would be reading the newspapers that cover this issue frequently. More likely, he was just an English teacher that “might” know beginner to intermediate Chinese. I just want to tell everyone that is not that experienced with China and is not that knowledgeable about the status quo of the Chinese economy to not believe this guy. Investing in China’s real-estate is a bad bad move.

What the funk is your problem? If you would’ve taken care to read a little bit more than just the “I’m not an economist” bit, perhaps clicking on the author’s name, you woud’ve noticed he is NOT an english teacher, but one of the most prolific writers on business and law in the english online sino-community. And his points are valid too. I’d recommend you some reading from Tom Miller of GK Dragonomics but I imagine you being more of dragon slayer type of person.

Fold your Jim Chanos-inspired ideas five times and put em where the moon don’t shine.

lpc1998

The 60 Minute “scare story” is based on the assumption that there is a real estate
bubble in China, similar to that in the US resulting in the 2008 Great Financial Crisis. For such a crisis to happen, it is crucial that there are enormous bank loans and financial derivatives tied to these loans that would decimate the economy when the bubble bursts. The report only makes passing references to huge developers’ bank loans and loss of household savings (not massive household’s debts as Chinese buyers are known to pay for the properties in cash or largely in cash) when the property prices plunge quickly and sharply.

So the assumption is false. The phenomenon is more a manifestation of wealth than a housing bubble waiting to burst:

A bubble does not require leverage to exist, bubbles have been formed on savings (i.e. equity or assets) before. This isn’t to say there is a bubble in China (I believe there is), but just to say your idea that there can’t be one because of lack of a similar layer of leverage similar to America is false.

There is a huge bubble in China. I live near Fort Collins Colorado, where prices are $120/sq foot. Meaning about 670,000 RMB for a 90 sq house. A similar house in Shijiazhuang is also about 670,000. However the income in Fort Collins is 470,000 RMB per year, Shijiazhuang is about 40,000. There is most definitely a bubble in China’s real estate. The very head of the government of China acknowledges this.

quesrty

60 Minutes is following this story from 2011 by the Australian SBS channel:

Even tier-2 cities like Suzhou and Hangzhou are scary expensive. I lived in SIP where I lived in a 190sq. meter apartment that rented out for less than $2K (USD) a month yet would’ve cost almost a million to buy. The occupancy rate in the 2 years I was there went from about 15% to about 35%, but it was still a nice, new, and empty, building when I left late last year. I had a Chinese staff who could barely afford an 80sq. meter flat half an hour away and that’s with parents’ help on both sides (husband/wife) PLUS their combined salary, and these folks are considered nuveau middle class with (relatively) good income.
I still think the bubble exists and wouldn’t touch that housing market with a 500′ pole.

kimc

This is an interesting, almost refreshing take on China’s ghost city phenomenon. It points to how complicated the the phenomenon is and offers a different way of looking at the issue. I saw the 60 Minute coverage that the author is referring to and was
also left with sentiments that it was relating just one side of the story. What often gets left out is how the local residents of these ghost cities – or those living/working near one – understand and occupy these spaces which I think should be part of the discussion.

Guest

This is an interesting, almost refreshing take on China’s ghost city phenomenon. It points to how complicated the phenomenon is and offers a different way of looking at the issue. I saw the 60 minute that the author is referring to and was also left with sentiments that it was relating just one side of the story. What often gets left out is how the local residents of these ghost cities – or those living/working near one – understand and occupy these spaces which I think should be part of the discussion.

lpc1998

You are right that the “ghost cities” phenomenon in China may be seen as a bubble, but not the kind that could devastate the banking system as the purchases are mainly in cash.

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